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The central dynamic of the last 12 months continues to dominate financial
market price action.
That dynamic is:
1) The global economy is contracting with former engines for
growth (Emerging Market economies, particularly China) growing little if at
all.
2) Financial markets continuing to rally/ hold up in hope of
additional monetary measures by Central Banks.
Regarding #1, the recent spate of economic data is absolutely awful:
1) In China, the official growth numbers suggest GDP is
growing by 7.3%, however…
China’s electricity consumption suggests GDP growth is 3% at best.
China’s rail freight volume for the first eight months of 2015 fell
10.1% from the comparable period in 2014.
China’s monthly Caixin PMI reading has fallen to levels not seen since
March 2009: when everyone thought the world was ending.
August exports fell 5.5% year over year following an 8.9% collapse in July
(exports account for 30% of China’s GDP).
Let’s now turn to Japan, where the largest QE program in history was
launched in April 2013, only to be increased in October 2014. This was a
Keynesian dream come: an amount of spending equal to 25% of GDP.
2) Since that time, Japan experienced an uptick in economic
growth for two quarters before turning back down again. Which brings us to
today.
Japan’s GDP shrank at an annualized pace of 1.2% in 2Q15.
Industrial production fell 0.5% in August, after falling 0.6% in July,
indicating that Japan is in a technical recession (the country’s second in as
many years).
Consumer prices fell 0.1% in August, marking the first drop in two
years…suggesting a return to deflation.
So that’s the second and third largest economies in the world teetering on
the verge of recession… but what about the largest economy, the US?
3) In the US…
Industrial production declined in the first five months of 2015. This has
ALWAYS coincided with a recession. Currently it is showing zero growth year
over year.
As Barclay’s research recently revealed, US corporate profit margins have
declined 60 basis points, a reading that has coincided with a recession five
of the last six times it triggered.
All four September PMIs recorded sub-zero readings, which only occurs when
the US economy is already five to six months into a recession.
a. Both Regional Manufacturing Surveys and
Merchant Wholesaler Sales, imply a recession.
So, the world’s three largest economies, the US, China and Japan are all
approaching if not already in recession. These countries represent nearly a
third (29%) of global GDP approaching,
Anyone who thinks that somehow this will not impact the rest of the globe
is out of his or her mind.
Another Crisis is coming. And this time around, Central banks will have
next to no ammo to face it.
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